Nutrisystem (NTRI) fat profit
In light of Nutrisystem impressive profit, we are re-posting our original analysis of NTRI from 2-7-07:
The weight loss industry is a huge market. The majority of Americans are now overweight. Obesity is so severe even Congress is getting involved. As a society we continue to value and promote the ideal physique. This is evident by the fashion and entertainment industry which continues to promote the “ideal weight”. Anything less is seen as unacceptable. NutriSystem (NTRI) and other weight management companies certainly stand to benefit from this social issue.
Within the weight loss industry, NTRI, Jenny Craig and Weight Watchers (WTW) are the dominant names. Surprisingly, for a huge industry, there are not very many established brands. While there are a lot of smaller companies in this sector, they are not as well recognized. The company’s pre-packaged food and other diet products are well accepted within the industry.
The main challenge we see with the weight management companies is the client turnover rate. Speaking from my own experience, I know it is extremely difficult to stay focus when dieting. Most diet program usually results in failure where people would simply give up or the process becomes too cumbersome to maintain. In some respect this could be a positive given some customers will return to the program after such failure.
Our view on NutriSystem (NTRI) is a little cautious at this point. While NTRI has dropped considerably due to the lower than expected forward guidance, the stock appears to have hit bottom. With that said the stock is up over 3 percent today and trading at around $45 per share.
Our take on NTRI is the stock is unlikely to head back to previous level in the near future, but it does appear NTRI risk to reward prospect looks good. Another $5 gain is certainly feasible if the overall market condition continues to remain positive. In comparison to its peer, this stock should be at $50 even with the lowered guidance. Overall, we believed NTRI is trading at a discount as the chances of it going lower are unlikely as the negative news has already been priced into the shares. While we would not bet the farm on this stock, it is certainly attractive at this level.
UPDATE-2-14-07: NutriSystem sees 2007 profit above Street views. NTRI reported today and beat Wall Street expectation. Moreover, the company raised its guidance for the year. The stock is up almost 12% in after hours trading. Looks like we made the right call on this one. Hopefully some of you bought NTRI. If you missed the opportunity, do not worry. There will be more opportunities. Thanks to our readers for bringing NTRI to our attention.
UPDATE-2-21-07: Like the British, NTRI is now on the retreat. The stock has fallen back to $46 per share. All the gains from the recent run has all about vanished. It is too difficult to call at this point, this stock could continue to decline as speculators and short term traders appears to be locking in their profit. If you are a long term investor, there is no reason to worry. You might even consider buying more. If you are in it for the fast buck, it is time to salvage any gain you might still have. Good Luck! Trading is so much fun.
UPDATE: 3-30-07: One of our readers, "stock detective", just provided a great comment about NTRI. Here is an excerpt from the comment:
"NTRI Appears to be breaking out with the potential to return to presell-off levels if not new highs. Persistent high level of short interest is bullish. Float has decreased in the face of company stock buy back. Additionally, the stock has shown strong price behavior with reasonably good volume over the past month".
Our take on the situation is NTRI is now in favor again with Wall St. The stock buybacks certainly helped, so was the earning surprise. In our view, the recent sell-off had little to do with the company; the overall market was just terrible. Given the volatility of the market, we believed it would be prudent to take some money off the table at this point. Assuming you have bought it back in the low 40s, that’s a decent gain. By the way, NTRI is up over 4% today at $52 per share. If you missed the opportunity to buy, today would not be the best time to get in. There will be another opportunity. We believed if you are able to buy NTRI in the mid 40s, you will do alright. Good Luck!
Update: 4-25-07: NTRI posted a great first quarter earnings, beating Wall St. expectation by a mile. The stock is up a whopping 13% in after hours. This company is so confident, their estimates for the year is also beyond most analysts have been expecting. NTRI is now up almost 45% since we first started tracking this stock. Although we love the bullish view, we plan to take more profit at this level. The stock has already performed well above our expectations.
Comments
Hmmm.. Is it time to buy yahoo..???
Posted by: Ron Mexico | April 26, 2007 02:14 PM
Yahoo is tough to call as we have been burned by our optimistic view. Judging from our experience with panama, their new ad system is not much of an improvment. While the clicks may be going up, the cost per clicks are down. They will need more than a 10% improvement in clicks to show substantial profit.
Despite the negative view, we bought more of Yahoo! last week at $27.50 as we felt the stock was oversold.
Posted by: iBooyah | April 26, 2007 02:21 PM
Thanks for the update on NTRI. I bought during its Feb weak at $45. Do you think I should take profit now at $60 or wait for more buy interests to push it higher? Because this stock has been shorted heavily before earning, I think at least some of these shorts have to cover at this level.
Posted by: As | April 26, 2007 03:09 PM
As, congratulation on your gain, that's 33% in less than 3 months. That's quite impressive.
It's really tough say on whether one should sell or hold since we don't know your situation. If it were us, we would sell half now and let the other half ride. This way you can lock in your profit and still remain in the game. The recent run up has made the stock quite expensive so we doubt NTRI will continue to go much higher without significant development. The market is very efficient so we don't know if there are any other interested buyers out there that isn't already aware of NTRI's success. Hope this helps.
Posted by: ibooyah | April 26, 2007 03:39 PM
Hello again! As always thanks for providing this thoughtful and interesting forum.
I agree that at this point Nutrisystem is approaching the risk side of the risk reward equation. Nevertheless, I remain bullish on the stock anticipating it making new highs before next earnings report in July.
Short term I am bearish on the stock and see a near term price decline. If one cannot stomach seeing the share price decline 8-10% consideration should be given to either selling part or all of their holdings, locking in a profit as you recommend and look for a lower entry point or hold their stock and sell covered calls. Currently the May 65 calls are offering an attractive premium as are the June 65’s. For the more adventurous consideration should be given to selling the May 60 or June 60 calls as overwrites. The reason to consider these calls is that in looking at the multi-year chart for Nutrisystem one quickly realizes that with the exception of a gap back in April ’05 NTRI has religiously filled multiple gaps in its chart. Often, the size of these gaps have seemed unfillable. However, in spite of this they have been filled.
Currently a gap exists at $58.73. I believe this will be filled in the near term and will certainly have to be filled prior to making a run to new highs. Open options positions should be closed as soon as this gap is filled if they haven’t expired because once this occurs I see big upside price movements. One other point of interest is the fact that NTRI closed towards the bottom of its trading range the day after its earnings release in spite of gapping up significantly. I think the reason it didn’t explode like AMZN has to do with the overhead supply created by the sell-off in January. Given the high volume the day after earnings release a lot of this supply may have been eradicated. However, until a new high is made overhead supply remains. The manner in which the stock is able to break through the overhead supply will determine if it should be held longer term or be added to. I do not anticipate a short squeeze coming into play until the stock is at or near its 52 week (all time) high of $76.33.
More later
Posted by: Stock Detective | April 28, 2007 11:20 AM
I'd like to know your opinion on Bank of America(BAC). It's nearly at its yearly low now $48.80. Do you think it's a buy or we should wait for a while? I know there is a lot of hype about subprime lending, otherwise it wouldn't have gone that low. Btw, thank you for your forecast on ALJ (bought it when it was $27, now $43). And do you still believe in SUNW? Thanks, Eugene
Posted by: Eugene | July 2, 2007 01:30 PM